RAILROAD COSTS, RETURNS TO SCALE, AND EXCESS CAPACITY.

This article focuses on railroad costs, return to scale and excess capacity. Investment in railroad trackage is not easily varied with traffic levels. This fact, brought about both by public regulation and by the inherent indivisibility of the railroad plant, poses problems in estimation of railroad cost functions from cross-section data. In this article, a model is developed making short-run costs a function of both traffic and plant investment. The model is then estimated over a cross section of railroads, and a long-run cost envelope is derived from the estimated short-run relationship. In this model study, two separate types of output are specified, gross ton-miles of freight service and gross ton-miles of passenger services. The model developed herein estimates two types of potential scale economies in the railroad industry, returns to traffic density and returns to firm size. The results indicate substantial unexploited economies of traffic density for most railroads, but constant long-run returns to scale.